291 U.S.

183
54 S.Ct. 353
78 L.Ed. 719

HELVERING, Com'r of Internal Revenue,

v.
FALK et al.
No. 225.
Argued Dec. 11, 1933.
Decided Jan. 15, 1934.

The Attorney General andMr. Erwin N. Griswold, of Washington, D.C.,

for petitioner.
Mr. Charles F. Fawsett, of Milwaukee, Wis., for respondents.
Mr. Justice McREYNOLDS delivered the opinion of the Court.

The Bristol iron ore mine in Michigan, while subject to a fourteen year lease
providing for royalties of 19 cents per ton, was conveyed to three trustees to
hold during two lives and twenty-one years with power to manage, sell, lease,
mortgage, or otherwise dispose thereof. After providing for payment of taxes,
expenses, etc., the deed directed: 'Except as above authorized to be expended,
paid out or retained, all proceeds which shall come to the hands of the Trustees
from said property or from any use which may be made thereof, or from any
source whatsoever hereunder as received by the Trustees shall belong to and be
the property of the beneficiaries hereunder to be distributed and paid over to
them in proportion to and in accordance with their respective interests as shown
herein, or as the same shall from time to time appear as hereinafter provided.'

Respondents are the beneficiaries under the deed and owners of the entire
economic interest in the mine. Its life was estimated as nine years. Proper
depletion allowance would be 13.255 cents per ton of ore extracted.

During the years 1922 to 1926 the trustees collected large sums as royalties.
After deducting expenses they distributed what remained among the
beneficiaries. Claims for depletion made by the trustees in their tax returns

were disallowed.
4

Each beneficiary claimed the right to deduct from the total received his
proportionate share of the depletion. This, he maintained, was not subject to
taxation under the statute. The Commissioner demanded payment reckoned
upon the whole amount; and the Board of Tax Appeals accepted his view. The
court below thought otherwise and sustained the taxpayers.

There is no substantial dispute concerning the facts. Our decision must turn
upon construction of the statute.

The Revenue Act of 1921, c. 136, 42 Stat. 227, 233, 239, 241, 246, 247,
imposes a tax upon the net income of property held in trust, sections 210, 211,
219, and directs that in order to determine this there shall be deducted from
gross 'in the case of mines, oil and gas wells, other natural deposits, and timber,
a reasonable allowance for depletion and for depreciation of improvements,
according to the peculiar conditions in each case.' Section 214(a)(10).

Also it requires the fiduciary to make return of the income of the trust, section
219(b), and provides that whenever income must be distributed to beneficiaries
periodically the amounts paid out shall be allowed as an additional deduction in
computing the net income of the trusts. In the latter event there shall be
included in computing the net income of each beneficiary so much of the
income of the trust as he has received. Section 219(e).1

The relevant provisions of the Revenue Acts of 1924 (c. 234, 43 Stat. 253, 269,
272, 275) and 1926 (c. 27, 44 Stat. 9, 26, 28, 32, 26 USCA 955(a)(9),
956(b), 960 note) are substantially the same as those in the Act of 1921.

The argument for the Commissioner is thisThe entire proceeds from the
working of a mine constitute income within the constitutional provision and
may be subjected to taxation without regard to depletion. Here the beneficiary
claims deduction for an item subject to taxation as gross income; but no
provision in the statute allows him to subtract anything because of depletion.

10

Moreover, section 219 expressly requires every beneficiary to include in his

return the portion of the income of a trust distributed to him. Thus in terms he is
subjected to taxation upon the whole of this.

11

Whatever may be said concerning the power of Congress to treat the entire

proceeds of a mine as income, obviously this statute has not undertaken so to

do. The plain purpose, we think, was to tax only that portion of the proceeds
remaining after proper allowance for depletion. This allowance represents
property consumed, is treated as if capital assets, and no tax is laid upon it. The
statute must be so applied in practice as to carry out this purpose. The intention
was that owners of beneficial interests should not be unduly burdened.
12

Since 1913 all Revenue Acts have left untaxed the proceeds of a mine so far as
these represent actual depletion. And this court has often recognized that this
immunity enures to the beneficial owners of the economic interest.

13

Lynch v. Alworth-Stephens Co., 267 U.S. 364, 370, 45 S.Ct. 274, 276, 69
L.Ed. 660. 'The plain, clear, and reasonable meaning of the statute seems to be
that the reasonable allowance for depletion in case of a mine is to be made to
every one whose property right and interest therein has been depleted by the
extration and disposition 'of the product thereof which has been mined and sold
during the year for which the return and computation are made.'

14

United States v. Ludey, 274 U.S. 295, 302, 47 S.Ct. 608, 610, 71 L.Ed. 1054.
'The depletion charge permitted as a deduction from the gross income in
determining the taxable income of mines for any year represents the reduction
in the mineral contents of the resreves from which the product is taken. The
reserves are recognized as wasting assets. The depletion effected by operation
is likened to the using up of raw material in making the product of a
manufacturing establishment. As the cost of the raw material must be deducted
from the gross income before the net income can be determined, so the
estimated cost of the part of the reserve used up is allowed.'

15

Murphy Oil Co. v. Burnet, 287 U.S. 299, 302, 53 S.Ct. 161, 162, 77 L.Ed. 318.
'We think it no longer open to doubt that, when the execution of an oil and gas
lease is followed by production of oil, the bonus and royalties paid to the lessor
both involve at least some return of his capital investment in oil in the ground,
for which a depletion allowance must be made.'

16

Palmer v. Bender, Administratrix, 287 U.S. 551, 557, 53 S.Ct. 225, 226, 77
L.Ed. 489. 'That the allowance for depletion is not made dependent upon the
particular legal form of the taxpayer's interest in the property to be depleted was
recognized by this Court in Lynch v. Alworth-Stephens Co., 267 U.S. 364, 45
S.Ct. 274, 69 L.Ed. 660. * * * But this Court held that, regardless of the
technical ownership of the ore before severance, the taxpayer, by his lease, had
acquired legal control of a valuable economic interest in the ore capable of

realization as gross income by the exercise of his mining rights under the lease.
Depletion was therefore allowed. Similarly, the lessor's right to a depletion
allowance does not depend upon his retention of ownership or any other
particular form of legal interest in the mineral content of the land. It is enough
if by virtue of the leasing transaction he has retained a right to share in the oil
produced. If so, he has an economic interest in the oil, in place, which is
depleted by production.'
17

Freuler, Adm., v. Helvering, Commissioner, 291 U.S. 35, 54 S.Ct. 308, 78

L.Ed. 634 (January 8, 1934), construed section 219. We there said: 'Plainly the
section contemplates the taxation of the entire net income of the trust. Plainly,
also, the fiduciary, in computing net income, is authorized to make whatever
appropriate decuctions other taxpayers are allowed by law. The net income
ascertained by this operation, and that only, is the taxable income. * * * But as
the tax on the entire net income of the trust is to be paid by the fiduciary or the
beneficiaries or partly by each, the beneficicary's share of the income is
considered his property from the moment of its receipt by the estate. * * * For
the purpose of imposing the tax the Act regards ownership, the right of
property in the beneficiary, as equivalent to physical possession. * * *'

18

True it is that section 219(b) directs that in cases of 'income which is to be

distributed to the beneficiaries periodically, * * * the tax shall not be paid by
the fiduciary, but there shall be included in computing the net income of each
beneficiary that part of the income of the estate or trust for its taxable year
which, pursuant to the instrument or order governing the distribution, is
distributable to such beneficiary.' But we cannot accept the view that this was
intended to impose a tax upon that part of the proceeds which represents the
return of capital assets, whenever this has been paid over to the beneficiary. In
cases like the one before us so to hold would in practice result in taxing
allowances for depletion, contrary to what we regard as the plain intent of the
statute.

19

The petitioner relies upon Anderson, Collector, v. Wilson, 289 U.S. 20, 26, 53
S.Ct. 417, 419, 77 L.Ed. 1004. The conclusion there rests upon the construction
of the will. Under it the beneficiaries became entitled to no income until the
executors in their discretion should sell the corpus. 'What was given to them
was the money forthcoming from a sale. * * * Their interest in the corpus was
that and nothing more. * * * A shrinkage of values between the creation of the
power of sale and its discretionary exercise is a loss to the trust, which may be
allowable as a deduction upon a return by the trustees. It is not a loss to a
legatee who has received his legacy in full.'

20

Here the governing instrument directed payment to the beneficiaries of the

entire proceeds, less expenditures, etc., and the trustees must be regarded as a
mere conduit for passing them to the beneficial owners. Part only of the
proceeds was subjected to taxation. The other part was left untaxed and
remained so in the hands of the beneficiaries.

21

Affirmed.

22

Mr. Justice STONE (dissenting).

23

I think the judgment should be reversed. By a trust created by the lessor of a

mine, the trustees were authorized to collect the stipulated cash royalties of 19
cents per ton on ore mined, and to distribute them to the beneficiaries, who are
the taxpayers here, without setting up any reserve for depletion of the lessor's
capital investment in the mine. The beneficiaries were given no other interest in
the trust property or its income. It is not denied that the entire amount thus
received by them is income which may be taxed. See Burnet v. Harmel, 287
U.S. 103, 107, 108, 53 S.Ct. 74, 77 L.Ed. 199; Bankers Pocahontas Coal Co. v.
Burnet, 287 U.S. 308, 310, 53 S.Ct. 150, 77 L.Ed. 325; Stanton v. Baltic
Mining Co., 240 U.S. 103, 114, 36 S.Ct. 278, 60 L.Ed. 546. Cf. Lynch v.
Hornby, 247 U.S. 339, 38 S.Ct 543, 62 L.Ed. 1149. And the tax is imposed on
the entire amount received, subject only to such deductions as the statute
permits. The sole question to be decided is whether they are entitled to the
benefit of the statute authorizing the taxpayer, in computing the tax, to deduct
from income 'a reasonable allowance for depletion and for depreciation of
improvements according to the peculiar conditions in each case.'

24

As the statute permits the deduction only because the allowance represents a
return to the taxpayer, in the form of income, for some part of his capital worn
away or exhausted in the process of producing the income, see Murphy Oil Co.
v. Burnet, 287 U.S. 299, 53 S.Ct. 161, 77 L.Ed. 318; Bankers Pocahontas Coal
Co. v. Burnet, supra; United States v. Dakota-Montana Oil Co., 288 U.S. 459,
53 S.Ct. 435, 77 L.Ed. 893, it would seem plain that there is no occasion for a
depletion allowance, and that the statute authorizes none where as here the
taxpayer, a donee of the income, has made no capital investment in the property
which has produced it. This was not doubted where the deduction claimed, but
denied, was for depreciation, Weiss v. Wiener, 279 U.S. 333, 49 S.Ct. 337, 73
L.Ed. 720, and it was only because the court concluded that the taxpayer had
made a capital investment, represented by the minerals in place, that he was
permitted to deduct an allowance for depletion from royalties received from the
production of an oil well in Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77

L.Ed. 489, and of a mine in Lynch v. Alworth-Stephens Co., 267 U.S. 364, 45
S.Ct. 274, 69 L.Ed. 660. The function of the allowance for depletion as a means
of securing to the taxpayer a credit against gross income for so much of his
capital investment as is restored from the income does not differ from that for
depreciation or obsolescence when allowed as a deduction. See United States v.
Ludey, 274 U.S. 295, 47 S.Ct. 608, 71 L.Ed. 1054; Gambrinus Brewery Co. v.
Anderson, 282 U.S. 638, 51 S.Ct. 260, 75 L.Ed. 588; United States v. DakotaMontana Oil Co., supra. Legally and economically the statutory allowances for
depletion and depreciation stand on the same footing. Both are means of
restoring capital invested, the one, in ore, the other, in structures and
improvements. Both are allowed by same language in a single statute. Neither
has any function to perform if the taxpayer has made no investment to be
restored from income received. The incongruity of allowing the deduction for
depletion where the taxpayer has made no capital investment but denying it for
depreciation is apparent.
25

The income here, derived from mining royalties, cannot be said to be a return of
the taxpayer's capital because if paid to the lessor it would have restored to him
some part of his capital investment. The lessor, by directing that the royalties
be distributed to the beneficiaries, cut himself off from the enjoyment of the
privilege which the statute gives to restore his capital investment from
royalties, and he has denied that privilege to the trustees. The taxpayer may not
claim the benefit of a deduction which the statute grants to another, Dalton v.
Bowers, 287 U.S. 404, 53 S.Ct. 205, 77 L.Ed. 389; Burnet v. Clark, 287 U.S.
410, 53 S.Ct. 207, 77 L.Ed. 397; Burnet v. Commonwealth Improvement Co.,
287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399, and the petitioners are in no better
position to claim the privilege because the lessor, to whom it was given, has
relinquished it.

26

Mr. Justice BRANDEIS and Mr. Justice CARDOZO concur in this opinion.

Revenue Act, 1921, c. 136, 42 Stat. 227, 247.

'Sec. 219. * * * (e) In the case of an estate or trust the income of which consists
both of income of the class described in paragraph (4) of subdivision (a) of this
section and other income, the net income of the estate or trust shall be
computed and a return theeof made by the fiduciary in accordance with
subdivision (b) and the tax shall be imposed, and shall be paid by the fiduciary
in accordance with subdivision (c), except that there shall be allowed as an
additional deduction in computing the net income of the estate or trust that part
of its income of the class described in paragraph (4) of subdivision (a) which,

pursuant to the instrument or other governing the distribution, is distributable

during its taxable year to the beneficiaries. In cases under this subdivision there
shall be included, as provided in subdivision (d) of this section, in computing
the net income of each beneficiary, that part of the income of the estate or trust
which, pursuant to the instrument or order governing the distribution, is
distributable during the taxable year to such beneficiary.'